‘Junk rating will tip SA into recession’

At least one of the
international credit rating
agencies is likely to rate SA at
“junk” level in its forthcoming
rating, according to Goolam
Ballim, chief economist of
Standard Bank, and this
would see this country slip
into recession for the rest of
this year.
One of the agencies,
Moody’s, cast its rating votes
on Friday, May 6, and decided
to keep its rating on SA two
levels above junk at Baa2 (but
with a negative outlook).
The remaining two, S&P
Global Ratings (formerly
Standard & Poor’s Ratings
Services) and Fitch, currently
both rate SA at BBB-. But,
according to Ballim, although
Fitch held a stable outlook,
S&P are on the final step
before junk, rating SA at BBB-,
with a negative outlook.
And, Ballim told FTW, if
he had to place his bucks, he’d
bet on S&P (the biggest of the
three agencies) coming up
with a junk (non-investment)
rating in its next assessment.
“This,” he added, “would cut
the pool of foreign investors in
SA to a very limited number,
and considerably reduce the
investment inflow into this
country. And only high-risk
investors would look at SA.”
Cees Bruggemans,
chairman of consulting
economists Bruggemans &
Associates, was another who
suggested that not too much
should be read into Moody’s
assessment. It “shocked most
of SA senseless in the most
pleasant way imaginable” by
confirming its credit rating, he
said, even if qualified with its
downside outlook.
“Instead of downrating us,
we got a reprieve,” he added.
“This had been predictable
up to a point, but it certainly
wasn’t the dominant local
market expectation, where a
recent institutional poll, for
instance, showed over 80%
of respondents expecting a
downgrade this year.”
But he suggested that
we should not celebrate
prematurely, intimating
that this only bought SA
time. However, there’s a
general feeling in finance and
economic circles that worse
could be yet to come.
As Ballim told FTW, a
Bloomberg report stated
that in the views of 12-13
economists and analysts
surveyed S&P would lower
the nation’s rating to noninvestment
grade by the end of
this year.
“Four see the downgrade to
BB+, which will put SA on par
with Turkey and Indonesia,
coming as early as next
month,” it added. “Only four of
the 13 said Fitch would lower
its assessment by the end of
the year.”
However, despite these
pessimistic attitudes, the SA
government took Moody’s
rating to be part of its good
news story.
It is confident that its
partnerships with business
and labour can help it avert
a credit-rating downgrade
to junk, according to Jeff
Radebe, minister for planning,
performance, monitoring &
evaluation in the presidency.
And it led to finance
minister Pravin Gordhan
saying that he aimed to
show S&P and Fitch that
the country was on the right
economic track ahead of their
own reviews in the coming
weeks.
However, official data
released the following
Monday (May 9) showed SA
unemployment had reached a
record high, and cast a damper
on Gordhan’s efforts to
convince these agencies not to
downgrade SA’s credit rating.
And Bruggemans was not
convinced that government
optimism was justified.
“There’s one more pivotal
in Moody’s pronouncement
that fascinates deeply, and
that is its apparent belief that
renewed deliberations since
early this year among the main
social partners (government,
organised business and
organised labour) will lead
to actions that will improve
confidence, investment and
growth prospects in years to
come.
“It leads one to ask just
exactly what the rating agency
was told that has given it such
succour?”
Bloomberg also questioned
the government confidence in
remaining out of the clutches
of a junk rating, and pointed
out that many investors
already considered SA more
risky than some junk-rated
countries.
The cost of insuring
against a default by the
government for five years
using credit-default swaps is
38 basis points higher than
for Russia, which is rated
speculative grade by both S&P
and Moody’s, according to
Bloomberg data.
And indeed, the only
major emerging market with
contracts more expensive
than SA is Brazil, a country
which sees its president,
Dilma Rousseff, fighting
to avoid impeachment, and
which is facing its severest
recession in the last 100 years.